21 Mar 2017

UK public finances (Feb): Data revisions help keep spending plans on track

Philip Shaw

Chief Economist

Today’s public finances data for February showed a smaller-than-expected government budget deficit. The headline public sector borrowing measure, PSNBx, came in at £1.8bn.

That is somewhat lower than the consensus forecast of £3.2bn but fairly close to our own £2.1bn expectation. This outturn delivers a year-on-year decline in the deficit of £2.8bn – the largest year-on-year decrease since January 2016. Meanwhile, newly-received receipts data for previous months (pointing in particular to larger than previously estimated income and corporation tax receipts) have seen cumulative borrowing in the fiscal year to January revised down by £3.3bn, to £47.8bn.

The low borrowing outturn in February reflects a combination of a sharp slowdown in annual spending growth, alongside perky growth in receipts. In terms of the detail, central government current spending growth slowed down from +4.6% y/y in January, to +0.5% in February. Growth in current receipts picked up from +6.6% to +7.1% y/y. Within that, corporation tax receipts grew by a particularly strong +17.0% (although we note that under the new accruals-based method for calculating CT receipts, estimates for recent months hinge, in part, on OBR forecasts rather than hard data).

Data uncertainty notwithstanding, the broad trend is one of falling government borrowing. And in the last month of this fiscal year (March) the government only needs to borrow £0.3bn less than it did the previous March in order to meet the OBR’s forecast of £51.7bn total borrowing in 2016/17. Especially with today’s favourable revisions to the receipts data in mind, it is clear that the Chancellor, Philip Hammond, has benefitted from the stronger-than-expected performance in the UK economy since last June’s vote to leave the EU.

Looking forward, fiscal challenges lie in store for the government. According to the OBR, the 16/17 fiscal year saw the public purse boosted by some ‘one-off’ factors, including the abolition of the National Insurance Contribution contracting-out rebate and forestalling ahead of a rise in dividend taxes in April. These ‘one-off’ factors should unwind next year and we also anticipate an impending slowdown in economic growth to weigh on tax receipts. What’s more, the Chancellor might seek to plug the funding gap created by his embarrassing u-turn on National Insurance Contribution rises for the self-employed. Nevertheless, our big-picture view is that, with the economy set to avoid too sharp a slowdown over the next couple of years, a sustained reduction in the deficit should continue.